Peter R.
Dickson
The Static and Dynamic Mechanics
of Competition: A Comment on Hunt
and l\/lorgan's Comparative
Advantage Theory
The author provides constructive criticism of Hunt and Morgan's (1995) promotion of the dynamic disequilibrium
paradigm and explains why their comparative advantage and market orientation theory is not dynamic enough. He
discusses what creates market diversity and comparative advantage, why competitive markets are more efficient,
how competitive markets fail, and how management of failed markets can fail. The author's goal is to demonstrate
the explanatory power of the dynamic paradigm and encourage the use of it to focus on how firms can learn to
improve their competitive processes.
H
unt and Morgan (1995) (hereinafter temied H&M)
make several important contributions to the market-
ing literature with their critique of the neoclassic
competitive equilibrium paradigm, their promotion of the
dynamic disequilibrium paradigm (hereinafter called the 3
paradigm'), and their theory of competition. Although
H&M acknowledge that several devastating and comprehen-
sive critiques of the established paradigm have appeared in
the economics joumals, it is useful for the marketing field to
have readily available their cogent critique of the underlying
premises of orthodox microeconomics thinking. Marketers
continue to see published research in marketing that uses the
equilibrium paradigm and premises to derive elegant math-
ematical models that, in tum, lead to prescriptive rules as to
how firms should behave.
Having offered an altemative theory of dynamic dise-
quilibrium (Dickson 1992, 1996) it would be disingenuous
for me not to support H&M in their advocacy of the 3 para-
digm. More to the point, whatever the relative merits of our
theories, marketing is the art and science of creating change
(disequilibrium) in markets in such a way that the change
benefits the firm (or an alliance of firms) and, consequently,
comparatively 'Wwadvantages" rivals. If a market is in equi-
1(9, or delta (the Greek d), is a symbol of change in calculus and
dynamic mechanics. In its use here it also stands for the d in
dynamic and the d in disequilibrium.
Peter R. Dickson is the A. C. Nieisen Chair of Marketing Research, Uni-
versity of Wisconsin-Madison. The author acknowledges the helpful com-
ments of Paui Farris, Alan Malter, Kerry Meline, Christine Moorman, Jan-
ice Payan, J. Paul Peter, Thekia Rura, Joel Urbany, and three anonymous
JM reviewers.
102 / Journal of Marketing, October 1996
librium, marketers are not doing their job. Marketing practi-
tioners live and die by the d paradigm.
I found H&M's theory of comparative advantage stimu-
lating and provocative, which brings me to the purpose of
this comment. Although I accept and applaud much of
H&M's work, my fundamental concem is that their theory
of comparative advantage and market orientation lacks
explanatory power because it is not dynamic enough. In the
spirit of constructive criticism, I here discuss what creates
market diversity and comparative advantage, why competi-
tive markets are more efficient, how competitive markets
fail, and how management of failed markets can fail. The
goal is to demonstrate the power and precision of the 3 par-
adigm and encourage scholars, policymakers, and practi-
tioners to use the paradigm to focus on how firms leam to
improve their key competitive processes.
Rates of Change in Supply
and Demand
That consumer tastes, preferences, and behavior are always
changing together with the offerings of suppliers means that
comparative advantage itself must be a dynamic construct. A
dynamic theory of competition, which H&M aspire to
develop (p. 8), must focus on heterogeneity in the rates of
change (i.e., the dynamics) of supply and demand and not
on the current level of heterogeneity in supply and demand.
This requirement reveals the fundamental paradigmatic
ambiguity of H&M's theory. It does not fully embrace the
rate-of-change 3 paradigm in its explanation of comparative
advantage. For example, H&M's Figure 1 is a static or state
model of the relative competitiveness of a firm's offering.
This can be contrasted against the 3 paradigm, whereby
companies are constantly striving to move from one com-
petitive advantage to another (D'Aveni 1994). For example,
the race to compete in the notepad computer market is one
Journal of Marketing
Vol. 60 (October 1996), 102-106
of constant improvement in product speed, memory, battery
life, weight, picture quality, picture size, mouse design,
durability, and cost, which reflects a race between the lead-
ing companies to improve their design, manufacturing, sup-
ply-chain, distribution, and selling processes. With each
innovation-imitation cycle, the leadership may change (and
has changed), and the race gets faster and more demanding.
Few markets are so dynamic, but even mundane markets
charige as some innovation-imitation is always occurring in
product and process design (even if only by reducing the
costs of production processes).
The dynamic impact of changing supply on demand and
changing demand on supply can be mathematically
described as (Dickson 1992, p. 71, footnote 2; 1995a, p. 97)
(1) (ad/at: i= 1 nl,+ |=f({asj/at:j= I ml),,and
(2) {asj/9t: j = 1 m), = g({adi/at: i = I n}),. ,,
where 3di/3t equals change in demand of buyer i, 3sj/3t
equals changes in the supply function of supplier j , and ()
indicates the set of demand and supply functions across all n
buyers and m sellers. Assuming the reasonable premise of
response heterogeneity—that is, 3di/3t varies across i (some
buyers adopt new products faster than others) and 3sj/3t
varies across j (some suppliers leam and adapt processes
faster than others)—the interactive effects between and
within response vectors {3di/3t) and {3sj/3t} are guaranteed
to continue to amplify or ripple into future time periods.
These iterative interaction effects create a complex system
that will never come to rest in a state of equilibrium and,
hence, cannot be so specified (Day 1987). Entrepreneurs find
ways to exploit characteristics of this ever-changing disequi-
librium through innovation-imitation (Dickson 1992; Hayek
1978; Kirzner 1985; Schumpeter 1934), and their new initia-
tives create fresh higher-order amplification or ripple effects.
When the aforementioned sets of seller-supply functions
or buyer-demand functions exhibit regularities, then these
regularities are called path dependencies (Arthur 1994;
Dickson 1995a). Path dependencies are systemic negative or
positive feedback effects that create trends in supplier or
buyer behavior. For example, the systemic diffusion
processes in a market in which suppliers imitate each other
and consumers imitate each other is a common positive path
dependency (amplification) effect (see Robertson and
Gatignon 1986). As a market progresses through a series of
supply and demand path dependencies, the competitive
focus of the market shifts to new innovation-imitations in
different products and processes. Another way of putting
this is that the crucial quality and cost drivers of the prod-
ucts and processes within the market change. The introduc-
tion of 75 varieties of grind-your-own gourmet coffee beans
has created such a new path dependency in the coffee mar-
ket (Moukheiber 1995). By giving away over 10 million
copies of its Navigator software, Netscape may have created
a standard for commercial Intemet use (a supply and
demand path dependency) that favors the firm. Investors
were at least betting on this happening in 1995. Circuit
City's CarMax, a used-car superstore, may create a new path
dependency in the $275 billion used-car market and maybe
even in the new-car market. Such positive path dependency
effects generally increase the efficiency of markets over
time.2 The exceptions (i.e., market failure) occur when a
market pursues a product or service feature path that is less
desired by buyers than an altemative feature or when a com-
bination or coupling of market path dependencies leads to a
monopoly (i.e., elimination of all competition). How mar-
kets evolve along different types of path dependencies, how
they might become more efficient, or how they might fail
can be studied through simulation (Farris, Verbeke, and
Dickson 1995; Nelson and Winter 1982).
Hunt and Morgan effectively propose that heterogeneity
in the set of individual consumer demand functions, {dj: i =
1,..., n}, leads to heterogeneity in the set of individual seller
supply functions, (SJ: j = l,...m), where heterogeneity across
supply functions is measured on dimensions such as size
and scope, tn more general terms, this relationship can be
mathematically described as
(3) {Sj: j = I m|, = gdd,: i = I,..., n}),_ |.
By comparing Equation 3 with equations 1 and 2, we can
contrast it with my theory of competitive rationality and see
how H&M's theory can be made more dynamic. Hunt and
Morgan consider states of heterogeneity of demand and
supply rather than heterogeneity in rates of change of
demand and supply (i.e., variance in individual and market
leaming on both the supply and demand side). I now
demonstrate the significance of this distinction by using it
to explain what creates the "macro and micro" phenomena
of market diversity, comparative advantage, and market
efficiency.
How and Why Competitive
i\/larkets Are Diverse
When the rate of change of the supply functions of firms
(i.e., {3sj/3t: j = I,...,!}) varies across different aspects of
the firms' supply functions because of the variance in their
present and past higher-leaming capabilities, firms' sup-
ply functions will become diverse. This might seem at
first to be a descriptive truism—if firms are changing in
different ways at different speeds, then this must produce
diversity. But the proposition is not always true. Again, if
the changes follow a technological (supply) or a demand
path dependency, then such regularities in change (diffu-
sion of supplier or buyer behavior through innovation-
imitation) can lead to less diversity in supply. In organi-
zation learning, such path dependencies have been called
selection and retention processes and are well docu-
mented (see Miner and Haunschild 1995). They greatly
influence the structure of an industry and the diversity of
its behavior.
2The conventional price equilibrium paradigm allows negative
feedback effects (e.g., when demand increases, price rises and
profits increase, which increases supply and lowers price again).
What it cannot handle well are positive feedback effects caused by
innovations in, say, products or distribution logistics that are imi-
tated and that take the whole market down new parallel or sequen-
tial path dependencies.
Mechanics of Competition /103
 What Creates Comparative
Advantage
A theory of dynamic competition should not be based on
assumptions, premises, and propositions that describe static
market states. A theory of dynamic competition must
describe how markets change and what dynamics create the
change. Hunt and Morgan suggest this by using words such
as history and lead to. To illustrate, different firm scales and
scopes, as described by Chandler (1990, 1993), can be
explained by their innovation and imitation leaming history
in a market, which determines the rate of change in their
supply function over time (3sj/3t), which determines their
supply function (Sj) at any time. Scale and scope are charac-
teristics of Sj. Similarly, the comparative or resource advan-
tage of a firm's supply offering, which is measured in terms
of cost and value and is framed in H&M's Figure 1, is deter-
mined by 3sj/3t, which is determined by a firm's leaming
capabilities.
A firm can learn by simple S-R reinforcement
processes, mindless imitation processes, and accidental
experimentation (Alchian 1950; Miner and Haunschild
1995), but such leaming processes leave much to chance.
A firm's higher-order learning processes {complex
resources in H&M's terms) are defined as the processes
and systems instituted within the firm that deterministi-
cally drive the continuous improvement in all of the firm's
products and processes and, hence, determine future 3sj/3t
(Cohen and Sproull 1996; Dickson 1995b). Examples of
such higher-order leaming processes are a firm's design-
do-observe-redesign experimentation processes, imitative
benchmarking processes, total quality management evalu-
ation processes, and feedback control processes (e.g., cus-
tomer satisfaction tracking and activity-based costing), as
are processes that reward continuous process improve-
ment. A firm that manages such higher-order learning bet-
ter than its rivals has more control over its leaming, its
innovation-imitation, and its likely success. There is a
chance that rivals with inferior leaming processes will for-
tuitously gain a periodic comparative advantage in the
product of their supply processes, but the firm that devel-
ops and sustains superior, higher-order leaming processes
possesses a long-term, sustainable competitive advantage.
Thus, the fundamental construct is not comparative
advantage in product value and cost but is higher-order
leaming. To further demonstrate the value of this insight,
I apply it to H&M's conceptualization of market orienta-
tion as a resource that provides a sustainable competitive
advantage.
Does Market Orientation Provide a Sustainable
Competitive Advantage
Market orientation describes a set of organized intemal and
boundary spanning processes that enable the firm to leam
about, respond to, and lead changes in consumer, channel,
and competitor behavior. These include competitive bench-
marking processes and consultation with suppliers, distribu-
tors, and customers. Day (1994) has described how a firm
can use higher-order-leaming processes and principles (i.e.,
total quality management leaming processes) to improve its
104 / Joumai of Marketing, October 1996
market orientation and market-driven processes.-^ As H&M
point out, particular market orientation processes can be
readily imitated, but the culture that organizes all of the mar-
ket leaming processes together into a unique synergistic
comparative advantage may not. But by so proposing that
market orientation processes can be vicariously leamed
(imitated), H&M effectively answer the question as to
whether a market-oriented firm can "enjoy a sustainable
competitive advantage." It depends on the higher-order
leaming processes of the firm and its rivals; if rival firms are
continuously improving their market orientation processes
and culture at a faster rate than the firm, then the answer is
no. What can be more confidently asserted is that it is a
firm's higher-order leaming processes that create and sus-
tain its comparative and realized competitive advantages, t
next apply a macroeconomic generalization of this micro-
economic proposition to understanding market efficiency.
Market Efficiency
A corollary of the 3 paradigm and competitive advantage
theory is that market efficiency should not be conceptual-
ized as a level phenomenon but as a rate-of-change phe-
nomenon (i.e., a dynamic leaming phenomenon). Thus,
there is no such thing as an "efficient market." Instead, one
market is relatively more efficient than another if it is faster
at leaming to use input resources more efficiently and
effectively to increase customer satisfaction. Such leaming
is at the population level (Miner and Haunschild 1995) or
macro level of competitive rationality (Dickson 1996). A
market exhibits path dependencies in its sets or vectors of
changing supply and demand that reflect the adoption of
more efficient design, manufacturing, physical distribution,
communication processes, and management systems
(Chandler 1977, 1990, 1993; Dickson 1995b; Heilbroner
1993; Landes 1969; Mokyr 1990; Thompson 1993; Utter-
back 1994).
Why Competitive Markets Are More Efficient
This view of efficiency helps explain why, on average, the
lower the exogenous management of a market, the higher
the market leaming and, hence, efficiency of a market.
Competitive markets have endogenous (built-in) evolution-
ary leaming advantages (Dickson 1992, 1996; Hunt 1995).
^Sinkula (1994, p. 37) has described how a firm learns to
improve its core competitive advantages, competencies, or
processes, such as market infonnation processing as higher-order
leaming. However, in the strict meaning of the term, higher-order
leaming should describe the formal/informal, expressed/tacit
processes a firm uses to leam how to leam (i.e., deuteroleaming
processes [Bateson 1972]). For example, higher-order leaming
occurs when a firm leams from market-based observation of a
competitor's approach to process benchmarking or how it rewards
its sales force for continuous improvement suggestions. Using
market information to leam how to reduce costs or raise perceived
product quality is invaluable leaming, but not higher-order leam-
ing. Leaming how to improve imitative leaming processes or leam-
ing reinforcement processes is higher-order leaming (Dickson
1995b).
They are more efficient because they leam faster.'' They
leam faster because they are free to leam however much
they choose, and the resulting variance in leaming creates
rewards for the firms with superior "when and how" learn-
ing capabilities. Hunt and Morgan's explanation that inno-
vation is rewarded in free markets describes an important
leaming reinforcement mechanism, but it is insufficient.
For example, innovations also could be rewarded in a com-
mand economy.
The two conditions that are necessary and sufficient to
create a market that has a built-in leaming capability are (1)
the presence of the profit motive,' and (2) the absence of
autocrats or cabals in the political economy that overly con-
strain supplier and buyer behavior. The profit motive and
supplier and buyer freedom leads to heterogeneity in change
in supplier behavior and buyer behavior. As equations 1 and
2 explain, heterogeneity in rates of change and leaming cre-
ates a market in permanent disequilibrium, whose disjunc-
tures are further advanced and exploited by profit-seeking
entrepreneurial entities and their swift imitators. The regu-
larities in a competitive market's dynamic disequilibria (i.e.,
process and technological innovation-imitation path depen-
dencies) lead to higher levels of market input-output effi-
ciency. The metaphor for a competitive market is a perpet-
ual motion machine that is perpetually leaming to become a
more efficient input-output machine.
To keep apace with or stay ahead of such market leam-
ing, individual firms must continuously improve their man-
agement, supply, manufacturing, distribution, and marketing
processes. They must be ever more alert, ever leaming and
striving to serve the customer better than their rivals do (Day
1994). While waxing and waning, a competitive market is in
perpetual motion, trending (along path dependencies) to
ever greater efficiency and effectiveness in its use of
resources. Such a trending theory is similar to theories of
stop-start, punctuated equilibrium that are currently in
vogue in evolutionary economics (Gersick 1991). Moreover,
like biological evolution, market evolution is rapid in times
of exogenous systemic shocks that create scarcity (draughts
or recessions) and the introduction of predators or new com-
peting species (Weiner 1995). But, as long as a single sup-
plier is changing one or more of its supply processes and/or
a buyer's preferences and behavior is changing, the market
is never in a state of supply and demand equilibrium.
How Competitive Markets Fail
Across all of its many product and service markets, a com-
petitive market political economy is more efficient than a
managed political economy because of its built-in leaming
capabilities. However, specific product-markets in a com-
^In the opinion of a reviewer "the claimed 'endogenous leaming
advantage' is only true a fortiori (sic) in the case of extremes." This
seems an unreasonably restrictive and trivializing conclusion.
Characterizing the leaming advantage proposition as an "on aver-
age" generalization rather than a law allows for specific, periodic
exceptions, even in the case of extremes.
5The profit motive includes the drive of an economic entity to
survive. Recent case histories in the business press suggest that
"thin-rat" survival is a stronger driver of leaming than "fat-cat"
profit making.
petitive political economy may not always be as efficient as
they could be or might have been. A competitive political
economy's markets trend toward more efficient use of
resources, but, for a period of time, a market may pursue a
path dependency that is judged (often in hindsight) to be
inferior to another path that was less traveled than it could
have been. One such example might be the style path depen-
dency that the automobile product-markets pursued in the
1950s and 1960s at the expense of an innovation-imitation
path focusing on vehicle safety. From the dynamic perspec-
tive, this is a form of periodic market failure.^ It is periodic
because, as explained by the Austrian economists, the mar-
ket will ultimately correct itself in the direction of more-effi-
cient leaming and investment. An innovative entrepreneur
teaches the market about the inferiority of the current path
through a break-through innovation that creates a new path
(Hayek 1978; Kirzner 1985). In the meantime, other entre-
preneurs make incremental innovations that take a market
further along other existing paths.
How Management of Failed Markets Fail
The apparent periodic failure of a product-market is often
used to justify the remedial introduction of constraints on
the behavior of suppliers and buyers (i.e., market regula-
tion); but such market failures cannot be used to support the
general proposition that more market regulation makes mar-
kets more efficient. Furthermore, even when enlightened
market regulation is pursued to correct competitive market
failures, enlightened regulation itself can follow an ineffi-
cient path dependency.^ For example, environment regula-
tion has followed a pollution-control path rather than a
resource-productivity regulatory path (Porter and van der
Linde 1995). This has misdirected the "free" market's inno-
vation-imitation leaming processes and has consequently
frustrated the advancement of efficient environment protec-
tion. Regulatory path dependencies can be particularly per-
nicious because they are not subject to the same correction
forces as are path dependencies created by competitive mar-
ket forces. For example, this has led to slow imitation (cf.
private enterprise) of other states' apparently successful new
taxation policies or welfare regulation.
Even when govemments attempt to boost innovation by
sponsoring research and development (R&D), such efforts
can lead to path dependencies that are not easily reversed.
Rich countries spend over half of their $8 billion-a-year
energy research on nuclear programs and less than 10% on
R&D of renewable energy sources, such as solar and wind
^As was mentioned previously, it is theoretically possible that a
combination of path dependencies leads to what is called a market
bifurcation, in which a single supplier comes to monopolize the
market. But such obliteration-of-the-competition market failures
(not involving collusion or restrictive trade practices) are, in actu-
ality, so rare that it is hard to think of a single example.
^Because some regulation is always needed to protect contracts,
reduce deceptive infonnation, and protect third parties in product
markets, it can be argued that the real question is not whether mar-
ket economies are more efficient than managed economies, but
rather what regulatory policies most encourage efficient free-mar-
ket leaming processes that take the market along desirable learning
paths (see Dickson and Czinkota 1996).
Mechanics of Competition /105
power. To many economists, this does not make sense when
the costs of solar and wind power have been greatly reduced
by innovations and appear likely to soon become cost com-
petitive in many usage situations (The Economist 1995). The
focus on nuclear power R&D is likely to continue, propelled
by the political power ba.se it has created rather than by the
competitive dynamics of the energy market.
Conclusion
Hunt and Morgan have written an important article that
gives marketers clear directions as to which path they should
not take and some provocative glimpses of a path ahead that
provokes and encourages thinking about the causes and
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